Posts Tagged ‘BioPharma’

What makes for a successful IPO? Or sustained capital markets success for established public companies? Discussing the boom (or bubble) in biotech IPOs, an investment banker who specializes in capital formation for that sector, puts his finger on one of the key factors – which applies across industries and company life cycles.

The best management teams focus intently on cultivating relationships with the buy side over years instead of just during the IPO process itself.

Really, this is true whatever industry you’re in – and whether you’ve been public for 50 years or your IPO is still in the planning stages. Success comes from focusing on relationships, cultivated over time, especially with institutional investors who put money into your sector.

The CEO or CFO whose idea of investor relations is to gear up only when an offering (initial or follow-on) is at hand will walk into buy-side offices on the road show as an unknown – and therefore riskier – story to bet on.

The “known quantity” who has talked to investors for years, provided clarity and insights on his or her company and the industry, developed long-term relationships … That’s the management team long-term investors will want to put their money behind.

Now is the time (if it wasn’t weeks ago) for investor relations people to get on top of the question: What impact will President Obama’s healthcare overhaul have on our companies?

The ObamaCare question will be asked in first-quarter conference calls and one-on-one conversations, and companies ought to disclose the material impacts either before first-quarter earnings or in their normal reporting.

Already the disclosures have begun to emerge after the president’s March 23 signing of the new government framework for health insurance. For example:

AT&T said Friday it will take a $1 billion noncash charge when it reports first-quarter earnings. In a brief 8-K, the phone company said the charge reflects loss of a tax benefit for subsidizing retiree healthcare costs. AT&T also said it will review its health benefits in light of the new law and the added tax burden.

3M issued a news release and filed with the SEC on Friday, saying it expects an after-tax charge of $85 to $90 million, about 12 cents a share, when it reports first-quarter results. 3M did a more thorough job of explaining: ObamaCare eliminates a tax benefit for company payments that subsidize retiree prescription drug coverage. Under the new law, the extra tax bite doesn’t hit until 2013, but the change reduces the value of a deferred tax benefit on 3M’s books, so GAAP requires a charge now.

Caterpillar filed an 8-K estimating its tax hit at approximately $100 million, again to be recognized in Q1. Deere & Co. estimated its charge at $150 million, AK Steel at $31 million … and we can expect many more.

These filings with the SEC are not about politics, but bookkeeping, of course. Just another development that may require an 8-K and explanation in the next 10-Q. But editorial writers were quick to seize on the announcements as an “I told you so” moment on ObamaCare (The Wall Street Journalhere, Investors Business Daily here). And now Congress wants to call these evil companies on the carpet for – the horror – disclosing the cost of the new healthcare law in a timely manner.

Without wading further into the swamps of Washington, let’s just pay attention to our own duty as investor relations people: Each of us should be asking internally – if we haven’t already – what impact the health overhaul law will have. And how we need to disclose that, either now or with our upcoming quarterly results.

In a broader way, investors will be looking to companies in the biopharma, medical equipment, hospital and other health industries to provide analysis and forward-looking perspective on how ObamaCare will help (or hurt) future results.

Update Jan. 20 – After a week, our unscientific poll on whether share repurchases are a good way to create value shows 40% “It depends,” 35% “No” and 25% “Yes.”

An interesting comment on share repurchases – always a stock-market darling for some institutional investors – is reported today in the In Vivo blog, which covers pharmaceutical and biotech businesses and their capital markets:

During the breakout session after his talk here at the JP Morgan conference Sanofi CEO Chris Viehbacher was asked if Sanofi would consider a buyback. His answer was a resounding “no.” After explaining that his company was “clearly mindful of shareholder value” and citing Sanofi’s dividend as an example of that commitment, he gave his opinion on buybacks.

Companies resort to share repurchases when they’ve “run out of any ideas,” he said. “And the day we run out of ideas, I will retire on that day and let my successor do a share buyback.”

You have to give this CEO credit for his “over my dead body” directness.

My feeling is that repurchases make sense for some companies, in mature or out-of-favor businesses for example, as financial engineering that helps share value.

A firm with growth opportunities crying out for investment – say, new drug R&D projects needing 15-20% of revenues – can argue it has a better idea for using shareholders’ cash. Of course, then management has to deliver on the promise of those investments.

Suffering the slings and arrows of public distrust for the pharmaceutical industry, Merck & Co. is becoming more accessible to various stakeholders – and changing its business model based on what it hears – CEO Dick Clark says in the Q3 2009 issue of NYSE Magazine. Clark says restoring trust is about doing and saying:

At the end of the day, reputation is grounded in actions, accompanied by candid, timely and transparent communication.

Ya gotta love that Harvard Business Review! And Thomas H. Lee, MD, a prof at Harvard Medical School who writes the magazine’s Health & Well-Being column among other accomplishments. In the June issue, the good doctor tells us what we want to hear in “Good News for Coffee Addicts”:

What’s the engine that drives American business? Innovation? Perspiration? Capital? Try coffee. From the shop floor to the boardroom, java – and I don’t mean the software – fuels workers and shapes office culture. What’s more, a steaming cup of joe may be as good for your health as it is for the bottom line.

Despite some early knocks from medical studies in the Fifties and Sixties that didn’t realize the health effects they were seeing came from smoking, which used to go hand-in-hand with coffee drinking, Dr. Lee says recent science is trending strongly in favor of coffee. Doesn’t cause cancer – may help prevent some kinds. Not bad for your heart – may help prevent heart attack or stroke. Other conditions like diabetes, gallstones … well, the stuff is practically a magic elixir.

Full disclosure: You may have guessed I am one of those coffee addicts, and Dr. Lee sounds happily caffeine-buzzed. So it’s self-justifying. But I’m not on the Maxwell House payroll, and he didn’t cite any sinister funding from Big Coffee either.

To be even more balanced in my scientific reporting, Dr. Lee keeps mentioning “a cup or two” – he’s not measuring intake in pots a day. He warns against too much caffeine making you shaky, raising blood pressure and dehydrating you. And adding sugar, cream, whipped cream, caramel, chocolate …? Don’t go there. Probably the best health aspect of coffee is that it starts with zero calories.

So, as investor relations people who often are powered by a cup of coffee (or tea or something in a can), maybe we don’t need to feel guilty anymore. Thanks, HBR.

There may be no summer lovin’ for biotechs. By most accounts, investors will remain tight-fisted with their cash for some time, opening up their wallets for only the most promising investments.

Writer Eric Wahlgren cites Burrill & Company estimates that more than a third of 344 public biotechs were down to less than six months cash on hand at the end of the first quarter.

Despite the gloom, there’s still investment money out there, but companies will have to work harder to get it, experts say. The key to being successful at raising money in the current environment will be to think creatively, remain flexible, and start talking to potential investors well before there is an urgent need for cash.

In the BIO piece, industry players suggest biotechs may have to tap existing venture capital investors for inside-led rounds, consider venture debt, outlicense more compounds for the cash, set up special financing structures and the like.

One example of creative dealmaking is Exelixis, BIO says:

The advice for companies looking for cash, [Exelixis CFO Frank] Karbe says, is that they should always be having lots of discussions with all types of investors, including bankers, venture capitalists, specialty funds, and other biotech and pharma companies.

Thinking creatively and working harder, by the way, may mean experiencing more than the usual pain in fundraising and valuation – for example, selling the company when you’d rather just raise cash.

The advice to biotechs – work hard, stay flexible, be creative – probably applies to investor relations teams in many industries. Money doesn’t seem likely to rain down on anyone in 2009.

In any business, a collapse in stock price tends to stimulate soul-searching. Biotech companies have suffered, along with almost everyone else, a painful loss of value in the current bear market. Investments in R&D are risky, in a time when risk hasn’t been paying well. And the financial crisis has pretty much dried up equity offerings for biotechs or anyone else.

So the In ViVo blog, an offshoot of the business-of-medicine magazine of the same name, has been fretting lately about the state of biopharma companies. Today, the In Vivo blog noted that biotech industry leaders – like the Big Three auto companies’ CEOs – recently went hat in hand to Congress to beg for financial aid. The carmakers got a tougher reception, however, as Congress demanded the execs go back to Detroit and work out plans to revive their businesses.

Says In Vivo:

What’s odd to us is that BIO didn’t get the same assignment from Congress. We’ve never gone so far as Socrates in suggesting that the unexamined life isn’t worth living. But we do go so far as saying that the unexamined business plan sure isn’t worth funding. We’re all for biotech investors getting some additional incentives for funding the industry, but we’d also – for the good of investors, patients and taxpayers – like to see some ideas for how biotechs ever plan to make back the money they’re asking for.

The issue isn’t innovating scientifically. Or even clinically. The challenge is getting products approved and paid for.

And at the moment, biotechs aren’t doing that well enough to justify their funding.

Lurking in that exhortation for biotechs is advice that makes sense for all: Let’s go back to the business plan. Be sure we understand the path our companies are charting to achieve future sales and profitability. Let’s not focus so much on the minutiae of this quarter’s issues that we overlook the fundamental strategies to create value.

Especially in tough times, surviving and thriving – for companies and shareholders alike – is all about basics. So is investor relations.

One upshot of the current environment, for some companies, is a change in the identity of our true audience. As an investor relations person, I’ve always thought of investors – individuals, portfolio managers, value, growth, whatever – as the audience.

Alas, there is one liquidity event that won’t be appearing any time soon: the biotech start-up going public. Since the first of several painful Wall Street events began, there have been several biotech companies that have withdrawn their plans to go public … This clearly leaves biotech in a state of vulnerability, as IPO hopefuls may seem further from exit. This also means that ready, willing, and able buyers from Big Pharma will perhaps make a strategic acquisition.

A piece in the Nov. 10 issue of Fortune, “Big Tech Goes Bargain Hunting,” makes exactly the same point about small to mid-size tech companies and the cash-rich giants of technology.

Truth is, this applies to many industries. I’ve heard entrepreneurs in a variety of businesses talking about exit strategies: Private companies no longer count on doing IPOs, but view their most likely exit as being acquired. In the public company world, too, smaller companies are thinking more about acquisition as a path to maximizing shareholder value.

So let’s talk about the 800-pound gorilla. Our audience may not be a mutual fund analyst in Boston or a little old lady in Kansas City. The real target audience (or at least one) may be a bigger company that, in a few months or years, may replace our many shareholders with a single 100% owner. And our public disclosures also influence these potential acquirers.

Are the messages the same, or different, for an M&A audience? As investor relations professionals, committed to maximizing shareholder value, we need to study up on this class of investors. They may be strategic acquirers in the same industry, or financial buyers like private equity funds. I don’t know all the answers, but we ought to re-read The Quest for Value and pay attention to news and trade articles explaining the motivations and structuring of acquisitions.

My impression from a few M&A experiences is that deal-oriented investors do have different information needs, or preferences. Earnings per share are out; the acquirer or i-banker will apply ratios to EBITDA or net income. Enterprise value, debt on the books and cash in the bank are intensely relevant. Assets that can be sold matter. Working capital and cash flow. In the biopharma field, and perhaps others, future products also drive value – again, often via multiples of projected cash flows.

I remember, years ago, writing an annual report for my employer – our last as a public firm – while top management was negotiating to sell the company. The deal was finalized in the same time frame as the annual report. It was gratifying when, a few weeks later, someone on staff with the new owners told me their top management had been especially impressed by the extensive new-drug pipeline graphic that had been a labor of love in this annual report. IR mattered.

Some of the most meaningful forward-looking information a company can provide is insight into a new product and its expected economic value. Those new products drive our future growth, so their market profile and prospects are a key message for shareholders.

This is one of the critical challenges for biotech executives – to see beyond their own natural enthusiasm for an emerging treatment possibility and the positive support of consulting medical thought leaders – who may be somewhat removed from the actual practice in market conditions.

The PhDs are talking about biotech companies in this case, but the same principle applies to technology and consumer products. While a company’s consultants naturally tend to buy in to the excitement of a new product, the real decision makers out in the marketplace can be very skeptical. Uptake of a new product can take years. Market penetration can top out at 2% rather than 20%. The authors cite evidence of widespread physician reluctance to new drugs and call on biotech executives to do real market research, critically evaluate and realistically profile the prospects.

Management, of course, should possess the very best information on the characteristics of a product and the market it will serve. Investor relations professionals would serve their managements well to ask tough questions and press for rigorous, in-depth, reality-based information on the market potential and risks of new products. The tough questions investors ask.

And that will enable IROs to provide shareholders with the most accurate, complete information possible on the prospects of new products – and enable investors to size up their economic value.

One thing investor relations people need to improve is disclosure of risks.

I’m not talking about legal disclosures – pages and pages of “risk factors” in the 10-K or Q, from the possibility of bumpy economic times to, God forbid, the unexpected demise of the CEO. These are risk notifications. Yes, they inform investors – especially if one compares the current period to prior years to see what new risk factors have bubbled up – but the language is so, well, lawyerly.

We need to work on explaining and quantifying the business risks that an investor should incorporate in his valuation of our companies’ shares. The market gurus say it’s all about risk and return. But our focus in IR – and the obsession of many analysts – is on the income statement, the return side.

In the classic financial models, risk has everything to do with valuing a company. The stream of future cash flows that people work hard to forecast is discounted by the cost of capital, a subjective number that most analysts simply plug in as a guess. The real cost of capital, or discount rate, is made up of the risk-free return (easy to estimate) plus the risk premium (much harder). You formula buffs, get out the old textbooks or see here or here – and consider what goes into the “d” or “re” term.

As a profession, investor relations people need to work on how to profile risk in a company. Uncertainty is uncertain, but we have some qualitative and even quantitative assessments of risk- from the macroeconomic uncertainties right down to the sensitivities in a product’s sales.

Three recent episodes have started me thinking about risk:

… The massive failure of financial institutions to manage the risks of lending and investing activities, as evidenced by mega-writedowns by banks and I-banks continuing through 2008.

… Another meltdown in a biopharma company’s share price after the FDA called into question the safety of a key product for diabetes.

The issue of “miscommunicating risk” was raised this month in the IN VIVO blog, an adjunct to a magazine of the same name that covers deals and business trends in the pharmaceutical and biotech industries. IN VIVO commented:

There seems to be a big disconnect between the seriousness of a safety issue from the regulatory perspective (where a safety “update” by FDA treated two deaths from pancreatitis as important information for prescribers, but not a call to action) compared to the reaction of investors (“The sky is falling!”).

IN VIVO wondered aloud whether the two biopharma companies involved might have headed off the market’s Chicken Little reaction by better disclosing their perspective on the risks in advance, before the FDA turned on its loudspeakers.

In any industry, companies need to work hard at properly communicating risk. IROs should make it a major focus – preferably before the roof starts to cave in.